TORONTO -- Nortel(1) Networks Corporation (Toronto:NT.TO - News)(NYSE:NT - News) today announced results for the second quarter of 2007 prepared in accordance with United States generally accepted accounting principles (GAAP) in U.S. dollars. Results were driven by solid operating and gross margin expansion, evidence of the continued traction of the Company's business transformation program.

"Good progress is being made in our effort to reshape Nortel to deliver sustained value to shareholders. On balance, the key indicators of our financial health moved in a positive direction in the quarter," said Nortel President and CEO Mike Zafirovski. "Gross margin of 41.1 percent was the highest in eight quarters and the operating margin expanded significantly on a year-over-year basis for the fourth consecutive quarter. Revenues were down 8% this quarter, principally as a result of the UMTS divestiture and the timing of contract completion. Revenues were up 3% sequentially and we are confident that the traction we are seeing with customers will translate into much higher sequential growth for the remainder of the year."

Second Quarter 2007 Results

Revenues were $2.56 billion for the second quarter of 2007 compared to $2.78 billion for the second quarter of 2006 and $2.48 billion for the first quarter of 2007. The Company reported a net loss in the second quarter of 2007 of $37 million, or $0.07 per common share on a diluted basis, compared to net earnings of $342 million, or $0.79 per common share on a diluted basis, in the second quarter of 2006 and a net loss of $103 million, or $0.23 per common share on a diluted basis, in the first quarter of 2007. The net loss in the second quarter of 2007 of $37 million included special charges of $36 million for restructuring, a $35 million provision related to ongoing discussions with the SEC, a gain of $69 million due to favourable effects of changes in foreign exchange rates and a gain of $10 million on the sale of assets. The net earnings in the second quarter of 2006 of $342 million included a shareholder litigation recovery of $510 million reflecting a mark-to-market adjustment of the share portion of the global class action settlement, special charges of $49 million for restructuring and a loss of $12 million on the sale of assets. The net loss in the first quarter of 2007 of $103 million included a shareholder litigation gain of $54 million reflecting a mark-to-market adjustment of the share portion of the class action settlement and special charges of $80 million for restructuring.

Deferred revenues decreased sequentially by $29 million from the first quarter of 2007. Order input for the quarter was $2.68 billion, down from $2.81 billion in the second quarter of 2006 (note that second quarter of 2006 UMTS Access orders associated with the assets sold were approximately $184 million), and up from $2.59 billion in the first quarter of 2007.

Carrier Networks (CN) revenues in the second quarter of 2007 were $1.06 billion, a decrease of 16 percent compared with the year-ago quarter and an increase of 5 percent sequentially. In the second quarter, CN revenues were impacted by the UMTS Access divestiture and decreases in legacy products, partially offset by growth in VoIP and GSM compared with the year-ago quarter. Excluding the impact of the UMTS Access divestiture, CN revenues decreased by 5 percent in the second quarter of 2007 compared with the year-ago quarter. (a)

Recent CN highlights include:

Enterprise Solutions (ES) revenues in the second quarter of 2007 were $590 million, an increase of 23 percent compared with the year-ago quarter and a decrease of 1 percent sequentially. ES recorded the fourth consecutive quarter of year over year growth, driven by strong increases in the voice, data and applications businesses, which was positively impacted by the timing of contract completions.

Recent ES highlights include:

Global Services (GS) revenues in the second quarter of 2007 were $494 million, a decrease of 9 percent compared with the year-ago quarter, and an increase of 10 percent sequentially. The year over year decrease was largely due to a decrease in network implementation services primarily due to the UMTS Access divestiture and lower GSM services revenues, partially offset by growth in network management and support services. Excluding the impact of the UMTS Access divestiture, GS revenues decreased by 3 percent in the second quarter of 2007 compared with the year-ago quarter.(a)

Recent GS highlights include:

Metro Ethernet Networks (MEN) revenues in the second quarter of 2007 were $363 million, a decrease of 16 percent compared with the year-ago quarter and a decrease of 3 percent sequentially. The year over year decrease in revenues was primarily due to decreases in long-haul optical revenues not repeated in the second quarter of 2007 (due to the completion of large optical contracts in the second quarter of 2006) and in legacy data, partially offset by increases in metro optical and carrier ethernet revenues.

Recent MEN highlights include:

Gross margin

Gross margin was 41.1 percent of revenue in the second quarter of 2007. This compared to gross margin of 38.4 percent for the second quarter of 2006 and 40.4 percent for the first quarter of 2007. Compared to the second quarter of 2006, gross margins benefited from a shift in product mix in the CN and ES segments. The increase in the CN segment is primarily due to better product mix in the CDMA, business, and improved GSM Access and Converged Multimedia Networks VOIP margins.

Selling, general and administrative (SG&A)

SG&A expenses were $595 million in the second quarter of 2007, compared to $614 million for the second quarter of 2006, and $604 million for the first quarter of 2007. Compared to the second quarter of 2006, SG&A was favourably impacted by the UMTS Access divestiture and lower costs related to internal control remediation and finance transformation activities, partially offset by unfavourable foreign exchange impacts and increased sales commissions.

Research and development (R&D)

R&D expenses were $423 million in the second quarter of 2007, compared to $498 million for the second quarter of 2006 and $409 million for the first quarter of 2007. Compared to the second quarter of 2006, R&D was primarily impacted by the UMTS Access divestiture and lower employee-related expenses, partially offset by unfavourable foreign exchange impacts.

Other

Special charges in the second quarter of 2007 of $36 million included restructuring charges of $3 million related to our prior restructuring plans and $33 million related to the restructuring program announced in the Company's February 7, 2007 press release.

Other income (expense) - net was $122 million of income for the second quarter of 2007, which included interest and dividend income of $62 million, foreign exchange gains of $69 million and royalty income of $5 million. Foreign exchange gains were primarily driven by the strength of the Canadian dollar against the U.S. dollar.

Minority interest was an expense of $11 million in the second quarter of 2007, compared to income of $4 million for the second quarter of 2006 and an expense of $22 million for the first quarter of 2007.

Interest expense was $98 million in the second quarter of 2007, compared to $77 million for the second quarter of 2006 and $96 million for the first quarter of 2007. Compared to the second quarter of 2006, the higher interest expense was due to higher debt levels and borrowing costs as a result of the $2.0 billion senior unsecured notes issued in July 2006.

Cash

Cash balance at the end of the second quarter of 2007 was $4.47 billion, down slightly from $4.56 billion at the end of the first quarter of 2007. This decrease was primarily driven by a cash outflow from operations of $120 million. The cash balance includes net proceeds from the $1.15 billion convertible notes offering in March 2007. In September 2007, Nortel will redeem, at par, $1.125 billion principal amount of 4.25% convertible notes plus accrued and unpaid interest.

First Half 2007 Results

For the first half of 2007, revenues were $5.05 billion compared to $5.17 billion for the same period in 2006 (note that first half 2006 UMTS Access revenues associated with the assets sold was approximately $350 million). The Company reported a net loss for the first half of 2007 of $140 million, or ($0.30) per common share on a diluted basis, compared to net earnings of $171 million, or $0.39 per common share on a diluted basis, for the same period in 2006.

The net loss in the first half of 2007 of $140 million included special charges of $116 million for restructuring, a $35 million provision related to ongoing discussions with the SEC, a gain of $69 million due to favourable effects of changes in foreign exchange rates, a shareholder litigation gain of $54 million reflecting a mark-to-market adjustment of the share portion of the class action settlement, and a gain of $11 million on the sale of assets. The first half 2006 results included a shareholder litigation recovery of $491 million reflecting a mark-to-market adjustment of the share portion of the global class action settlement, special charges of $54 million related to restructuring activities and a benefit of $27 million related to the sale of businesses and assets.

Regulatory Investigations

As previously announced, in May 2007 the Ontario Securities Commission (OSC) approved a Settlement Agreement reached by the Staff of the OSC and Nortel, which settlement fully resolved all issues between Nortel and the OSC. The decision recognized the extensive efforts made by Nortel's senior management and Board of Directors to be forthcoming and transparent in reporting significant accounting and internal control issues, and then solving them.

As previously reported, Nortel has been under investigation by the SEC since April 2004 in connection with previous restatements of its financial statements. As a result of discussions with the Enforcement Staff of the SEC for purposes of resolving the investigation, Nortel concluded that a reserve should be provided. Accordingly, an accrual was recorded in the second quarter of 2007 in the amount of $35 million, which Nortel believes represents its current best estimate for the liability associated with this matter. However, this matter is ongoing and the ultimate outcome is still uncertain.

Outlook (c)

Commenting on the Company's financial expectations, David Drinkwater, interim chief financial officer, Nortel said, "For the full year 2007, we continue to expect revenues to be flat to down slightly compared to 2006, reflecting a decrease in revenues as a result of the UMTS Access disposition (note that 2006 UMTS Access revenues associated with the assets sold were approximately $660 million). We continue to expect full year 2007 gross margin to be in the low 40's, as a percentage of revenues, and we now expect operating margin to be around 5 percent, of revenues(d). For the third quarter of 2007, we expect revenues to be down in the mid single digits compared to the year ago quarter (note that third quarter 2006 UMTS Access revenues associated with the assets sold were approximately $156 million). We expect third quarter 2007 gross margin to be around 40, as a percentage of revenue, and operating expenses (SG&A and R&D) to be down slightly, compared to the year ago quarter."

Nortel Networks Ltd.